Growth and Game Changers for 2019-2020

The economy is anticipated to grow 4.5% - 5.5% for 2019-2020. Growth is driven largely by private consumption. Sectorally, the services sector is targeted to sustain growth at 6.3%. Other sectors are anticipated to grow more measuredly. This is the Government’s prognosis in the last mid-term review of the 11^th Malaysia Plan (“Plan”).

Beyond thrusts and pillars, the Plan reviews the following game changers:

(i)        Uplifting B40 towards a middle-class society – that’s laudable, but improvements have been slow. For example, rural B40 household income increased form RM1,760 (2014) to RM1,969 (2016) while the urban household income for the B40 is now RM3,262. The starting salaries of fresh graduates have been “stuck” around RM3,000 – RM3,500 in the banking sector over the last 5-8 years and that is not helpful for private consumption led growth;

(ii)       Enabling industry-led Technical and Vocational Education and Training (“TVET”)-  quality is the issue and relevance to industry. The other problems (not cited in the Plan) in education include:

·         the emphasis of STEM by authorities while no supporting framework exists for graduates to be employed. It is time to have a Scientific Stream in the civil service;

·         then, English and its proficiency – which is poor for the private sector. A huge debate ensues along nationalistic lines if someone mentions the importance of English or Mandarin;

·         Quality schools and quality teachers – elite schools are necessary unless we believe in a levelised system that encourages mediocrity;

·         Issues on private tertiary education and PTPTN, amongst others;

(iii)      Embarking on green growth – the new Minister of Energy seems to be keen on renewables and I sincerely welcome that! It is something TNB may follow reluctantly. Besides SEDA, the regulator, a Renewable Energy Corporation needs to champion it for business, factories and homes;

(iv)       Productivity – a huge area for improvement with automation, AI and digital technology;

(v)        Innovation to wealth – community or sectoral-based research with tertiary institutions encouraged to work with industry/agriculture. Grants should be given based on success of commercialisation of research;

(vi)       Investing in competitive cities – only Kuala Lumpur, Johor Bahru, Kuching and Kota Kinabalu are mentioned. What about Penang, Ipoh or Seremban? The bulk of SMEs are probably on the west coast of Peninsular Malaysia and they provide employment, revenue and exports. So a broader industry-backed platform for innovation and financing is needed. P2P platforms on an industry basis could be helpful besides the traditional bank route.

We need early “fruits” of any Plan to make people believe there is a future and hope for everyone. God Bless!

Nostradamus 2019 Predictions!

The famed mystic Michel de Nostredame prophesied future events in 16^th century France, publishing them as four-lined quatrains. His followers believe that he predicted Adolf Hitler’s rise to power, the Great Fire of London and death of Henry II of France.

Cryptic passages supposedly predict outbreak of World War 3, fall of Western world and impact of an asteroid on Earth. None of these have come to pass but followers are now claiming 2019 is the year! So what are they?

Word War 3 could breakout between U.S. and Russia or U.S. and North Korea. And this will last for 27 years. Then there will be an asteroid impact which will destroy the planet as we know it. Rising temperatures will melt ice caps and major hurricanes will plague parts of the planet. People will also start talking to animals! The pig will be a brother to man.

So what do you make of it? Isn’t this astrology? But everyone loves a sage giving some prediction even if it is from the 16^th century! The problem with reading Nostradamus is he is always right after the event. So please don’t read too much into this and trust the God who is in control of the world! Have joyful and blessed New Year!

Hot Deals for Monday WW01'2019

Welcome to Hot Deals for Monday, where you have opportunities to Buy or Sell!

Opportunity 1

Marketing and retail footwear looking for new investors to acquire 20% stake in company.  Consistent dividends of 5% or more for over 5 years.

Opportunity 2

Company dealing in outdoor and gym equipment, has been in business for 15 years.  NTA around RM7.5 mil.  Profit ranging from RM0.5 mil – RM1.0 mil.  Profit guarantee is feasible.  Offering price RM5.0 mil.

Opportunity 3

An established education institution (college) with 3 licenses for sale at RM3 million.  Students of over 500 and EBITDA of RM0.5 million per annum.

Opportunity 4

A European company is looking to acquire or JV with beverages company (including water or milk players) in Malaysia, Myanmar or China.

Opportunity 5

Sale of Software & IT business with revenues of over RM100 million and net income in the range of RM1.5 - 2.0 million.  Controlling stake (approx. 70%) is available.

Opportunity 6

Buyer looking for power plant (100MW and above) in Malaysia, Myanmar, Laos, Vietnam, Indonesia, Philippines and Bangladesh.

If you are interested in the above opportunities or would like to offer your hot deals, please contact info@mpcap.com.my or 603 - 2283 1170 for further details!

Logit Regression on Overnight S&P500 Performance and Its Impact on KLCI

In a previous article, we demonstrated the capabilities of logistic regression (“logit”) on predicting potential loan defaulters (Read more here).  This week, we intend to illustrate another example of logit model application.

We often hear that overnight Wall Street’s performance might have an impact on the next day’s KLCI results, but how shall we quantify this?  To answer the question, we could use logit model to study the probability of the KLCI to close positively or negatively, given the performance of overnight S&P500.

In a logit model, if KLCI gains on the next day, it will be labelled as “1”, while it will be labelled as “0” if KLCI has loss on the next day.  X is the overnight S&P500 performance while b₀ and b₁ are the coefficients.  The coefficients are then estimated using Maximum Likelihood Estimation (MLE)

Chart 1 is the probability of KLCI Gain/Loss on next day given overnight S&P500 performance based on the logit model.  The probability distribution shows that if overnight S&P500 gained 5%, it is probably 99% sure that KLCI will gain on the following day.  If overnight S&P500 gained 1%, the chances for KLCI to gain on the next day is around 70%.  What if overnight S&P500 loss is 2%?  Then the probability of KLCI to close positively on the following day would be around 15%.

Chart 1

Table 1 shows the first 5 rows of the data and their respective equations while Table 2 is the summary of the logit with the estimated coefficients. 

Table 1

Table 2

Reference:

CFA Program Level II Reading Assignment by Sanjiv R. Das, PhD, Richard A. DeFusco, PhD, CFA, Dennis W. Mcleavey, CFA, Jerald E. Pinto, PhD, CFA, and David E. Runkle, PhD, CFA

Earn Money in a Future Without Jobs

Futurist Martin Ford says intelligent machines will replace humans in the workforce, causing massive unemployment and rattling the economy. His basic solution is a base income for all. And that is gaining traction.

The fear that automation might displace workers leading to unemployment goes back to over 200 years – the Luddite revolts in England. And this concern comes up every few years.

Progress is going to lead to new things and with new industries and they will need people for the new jobs. There will be new kinds of work. And that has been the positive story so far.

There is a lot of evidence to show that technologies are rapidly climbing the skills ladder. There will be impact on tasks done by accountants, financial analysts, journalists, lawyers, radiologists and so forth.

We could, of course, face underemployment rather than unemployment. You and I could face a very utopian framework – work less, more leisure, more family time and more time to do meaningful things in life. The best way forward then is to have some kind of guaranteed base income. The fear of this is that there may be too many people riding in the economic cart and not enough pulling the cart. So that will be a real challenge of future societies!

This Photo by Unknown Author is licensed under CC BY-SA-NC

The Future of Renewal Energy

In a recent study (by Jacobson and Delucchi) it was concluded that renewable energy based on wind, water and sunlight (“WWS”) could provide all new energy globally by 2030 and replace current non-renewable energy sources by 2050.

Projected global energy demand by 2030 is 17 trillion watts. Table 1 shows estimates of the potential energy available from various renewal energy sources:

Table 1: Availability of Global Renewable Energy

Table 2 presents results based on assumption that 90% of global energy is supplied by wind and solar, and 10% by other renewable.

Table 2: Infrastructure Requirements for Supplying All Global Energy in 2030 from Renewable Sources

What are the current issues?

(i)         Net Energy

Renewal energy sources generally have low net energy ratio, compared to fossil fuels (oil and coal). Net energy is the ratio of energy available for final consumption divided by energy required to produce it (or energy return on energy invested, the “EROI”). Table 3 demonstrates the net energy ratio for various energy sources.

Table 3: Net Energy Ratios for Various Energy Sources

(ii)        Intermittency

            Most energy supplies cannot be matched to demand as easily as fossil fuels. Energy diversity is one approach to intermittency and the other is to have battery storage. The latter needs further development.

A complete transition to renewable energy will likely take several years. In the meantime, fossil fuels especially natural gas-fired plants are best suited for balancing energy supply-demand.

Reference:

The Economics of Renewal Energy, David Timmons, Jonathan M. Harris, and Brian Roach, Tufts University

Merry Christmas